Sequence of Return Risk: The Silent Retirement Killer
Published on: August 27, 2025
When planning for retirement, most investors focus on inflation, market crashes, and achieving high average returns. However, there's a more stealthy danger that could devastate your retirement portfolio: sequence of return risk.
This often-overlooked risk could mean the difference between living comfortably for 30 years or running out of money halfway through your retirement. At WealthHQ, we're breaking down this critical concept and providing actionable strategies to protect your nest egg.
What is Sequence of Return Risk?
Sequence of return risk refers to the danger that the order in which investment returns occur will negatively impact your portfolio value, particularly when you're making regular withdrawals during retirement.
It's not just about what your returns are, but when you get those returns that matters. Poor returns early in retirement can devastate a portfolio, even if the long-term average returns seem adequate.
The Allan vs. Charlie Example
Consider this hypothetical example that illustrates the power of sequence risk:
Portfolio Value Over Time: Same Average Returns, Different Sequences
| Investor | Initial Portfolio | Annual Withdrawal | Average Return | Poor Returns Timing | Result After 15 Years |
|---|---|---|---|---|---|
| Allan | $1,000,000 | $50,000 (adjusted for inflation) | 6% | Years 1-3: -15% each year | $0 (runs out of money) |
| Charlie | $1,000,000 | $50,000 (adjusted for inflation) | 6% | Years 10-12: -15% each year | $247,391 remaining |
Both investors had the same average return of 6%, but Allan experienced poor returns at the beginning of his retirement, while Charlie experienced them later. The result? Allan exhausted his portfolio by year 15, while Charlie still had a quarter million dollars.
Historical Evidence of Sequence Risk
This isn't just theoretical—history provides compelling evidence of sequence risk:
| Retirement Year | Market Conditions | Maximum Safe Withdrawal Rate | Portfolio Longevity |
|---|---|---|---|
| 1966 | High inflation, stagnant stock market, poor bond returns | ~4% | Portfolios often struggled to last 30 years |
| 1982 | Rising markets, favorable interest rates | ~10% | Portfolios could support much higher withdrawals |
The difference is staggering—retirees in 1982 could safely withdraw more than twice as much as those who retired in 1966, simply because of market conditions during their early retirement years.
Does the 4% Rule Still Work in 2025?
The famous "4% rule" originated from the 1998 Trinity Study, which found that withdrawing 4% of your portfolio in year one of retirement, then adjusting for inflation each subsequent year, would likely sustain your portfolio for 30 years.
Recent analyses extending the data through 2022 suggest the 4% rule still holds, though some research from Morningstar indicates a slightly more conservative 3.7% withdrawal rate might be appropriate given current market valuations.
However, it's crucial to understand that these studies are based primarily on U.S. market data. When examining global data across 38 developed countries over 130 years, the safe withdrawal rate drops significantly—from 4.2% to just 2.26% for a 60/40 stock/bond portfolio.
3 Strategies to Combat Sequence of Return Risk
1. The Cash Reserve Strategy
Maintain 1-2 years of living expenses in cash or short-term bonds. During market downturns, withdraw from this reserve instead of selling depressed investments.
Impact: A retiree in 1966 who skipped just one withdrawal during the 1974 crash would have ended with $1.3 million after 30 years instead of being nearly broke.
2. The Bucketing Strategy
Divide your portfolio into "buckets" based on time horizon:
| Bucket | Time Horizon | Appropriate Assets |
|---|---|---|
| Bucket 1 | 1-5 years | Cash, short-term bonds |
| Bucket 2 | 6-10 years | Intermediate bonds |
| Bucket 3 | 10+ years | Stocks for growth |
This approach prevents panic selling during market downturns and provides psychological comfort.
3. Variable Withdrawal Strategy
Instead of withdrawing a fixed inflation-adjusted amount each year, withdraw a set percentage of your portfolio's current value. This means:
- Taking more in good years (giving yourself a raise)
- Taking less in bad years (tightening your belt)
This approach provides downside protection—you'll never completely drain your portfolio—though it does create income variability.
The Psychological Dimension: Don't Forget to Spend
Interestingly, a BlackRock survey revealed that many retirees still had 80% of their pre-retirement savings after two decades. Why? Because they couldn't mentally transition from saving mode to spending mode.
Over half of retirees refused to let their savings drop below a certain threshold, and 25% had no real withdrawal plan at all. The real danger isn't just blowing through your savings—it's not spending meaningfully when you actually can.
Key Takeaways
- Sequence risk is real: The order of returns matters just as much as the average return
- The 4% rule still mostly holds: But flexibility is crucial
- Implement protective strategies: Cash reserves, bucketing, and variable withdrawals
- Don't forget to enjoy your wealth: Money is a tool for living well, not just accumulating
Retirement planning isn't just about what you invest in—it's about how you manage withdrawals when markets turn ugly. By understanding and preparing for sequence of return risk, you can create a more resilient retirement plan that allows you to live comfortably while protecting your nest egg.
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